How to stimulate the economy, according to the experts


Spend tax money to stimulate the economy or cut tax rates to let businesses do the stimulating? That is the question.

L. Brent Bozell III, in an Investor's Business Daily column this week, points to a couple of economic studies that answer that question, one by an Obama adviser.

Bozell notes the difference in media reaction to when George W. Bush in 2004 faced 5.4 percent joblessness compared to Obama's 10 percent.

"Words mean something," Bozell writes. "Before he was even in office in January, Obama's economic advisers Christina Romer and Jared Bernstein issued a report on the economic situation.

"If nothing was done, they claimed, the unemployment rate would keep rising, reaching 9% in early 2010. But if the nation embarked on a fiscal stimulus of $787 billion, the unemployment rate was predicted to stay under 8%. So the Congress passed this massive spending plan, but instead, unemployment rose above the danger zone that these Obama advisers predicted if the spending plan did not pass."

So now the Congress is talking tax hikes to cover the cost of the stimulus.

It turns out Romer, with her husband David, wrote in 2007, "The strong negative relationship between tax changes and investment also helps to explain the size of our estimated overall effect on output. Recall that we find that a tax increase of one percent of
GDP lowers real GDP by about 3 percent, implying a substantial multiplier."

Bozell also does the courtesy of telling about a recent study by Alberto Alesina and Silvia Ardagna for the National Bureau of Economic Research that looked at historic data and found: "Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions."

That answers that question.